MNEs’ responses to institutional change and institutional failures

MNEs’ responses to institutional change and institutional

failures

University of Amsterdam, Faculty of Economics and Business Master Thesis

Business Administration – International Management First Supervisor: mw. F. Ciulli

Second Supervisor: August 31, 2015

Acknowledgements

I would sincerely like to thank my supervisor Francesca Ciulli. Her support was very valuable and gave me the time to conduct my thesis. Especially during my illness, her understanding and patience were much appreciated. I would also like to thank my employees at KnappeKoppen Amsterdam for their understanding and patience during this stressful period.

Sybren Brands Amsterdam, August 25th 2015

Table of content

1. Introduction ... 5

2. Literature review ... 7

2.1.1. Institutions ... 8

2.1.2. Institution-based view ... 9

2.2. Institutional change and systematic failure ... 11

2.3. Institutional engagement ... 14

2.4. Political strategy ... 17

2.5. Sustainable development ... 21

2.5.1. Sustainability and business strategy ...22

3. Method ... 27

4.1.1. Hard institutional failures ...39

4.2 Institutional engagement ... 45

4.2.1. Institutional co-evolution ...46

4.3 Political strategy ... 50

4.3.1. Information strategy ...52

4.4. Sustainable development business-level strategies ... 55

4.4.1. EDF ...55 4.4.2. E.ON ...60 4.4.3. RWE ...63 4.4.4. Iberdrola ...67

5. Discussion ... 73

6. Conclusion ... 77

7. References ... 79

Abstract

The impact of MNEs on sustainable development is largely unclear. MNEs normally adopt sustainable strategies to show that they are socially engaged, but nowadays MNEs are perceived as game changers that can support sustainable development in the organization, environment and society. Transforming the industry towards more sustainable development can be slowed down by institutional failure. MNEs are embedded in formal and informal institutions and have to understand and deal with these institutions in order to generate change. The complexity of institutions makes it interesting to study how MNEs address institutional change in order to support sustainable development. The research will adopt a multiple case study research design having as units of analysis the four major foreign energy MNEs operating in the UK electric industry. The first part of the study analyzed the significance of institutional failures regarding (sustainable) innovations, and the second part studied how MNEs address these failures through the adoption of three different types of actions, i.e. institutional engagement, political strategies and business-level strategies. Together this leads to the understanding that MNEs play an important role regarding the process of institutional change towards a more sustainable electric sector, in the absence of a well-functioning and unified regulatory framework.

1. Introduction

The quest for more sustainable development (SD) is transforming the landscape of international business (IB), which forces organizations to change their norms and values, technologies, strategies and business models. Sustainability is also known as the “social issue to which

corporations should pay attention because it offers both opportunities and challenges” (Escobar and Vredenburg, 2010: p39). Interestingly, the subject of SD and the multinational enterprise (MNE) behaviour has gained more attention over the years (Hart and Milstein, 2003; Steurer et al., 2005). MNEs have the power to influence different groups in the society and therefore they could take their responsibility to introduce more sustainable strategies. “The premise of the corporate social responsibility movement is that corporations, because they are the dominant institutions on the planet, must squarely face and address the social and environmental

problems that afflict humankind” (Hawken and McDonough, 1993: p.83). MNEs, especially in the energy sector, are nowadays viewed as the leading actors to introduce innovation, which is an interactive, non-linear process that includes different actors and institutions.

Innovation in terms of sustainability can reduce the negative externalities of organizational activity and reduce the harmful ecological footprint. Klein Woolthuis et al. (2005) introduced a clear-cut categorization of failures that impede innovation. However, the authors did not

connected institutional failures directly to MNE behaviour. MNEs tend to conform to the existing institutions, i.e. formal rules and regulations and informal norms, values and beliefs (Dimaggio and Powell, 1983; Scott, 2001). However, organizations also have the possibility to influence the institutional framework (Oliver, 1991). Therefore does this research highlights the proactive stance from MNEs and identifies how MNE behaviour can influence the process of institutional change that leads to more SD and ho wit addresses the failures which impede it.

Taken together, this research analyses the institutional environment and MNE behaviour from an international business (IB) perspective. Institutional theory relates to the rules and

regulations that create stability within environments, industries and organizations (Scott, 2001). This research aims to provide insights in the process of institutional change regarding the role of MNEs and (SD). Such a view leads to the following research question: ‘How do MNEs

address institutional change and its failures in the host country where they operate to support sustainable development?’ To find a justified answer, this research will conduct a multiple

embedded case study, which consists of two parts. The first part of the study identifies the significance of systematic institutional failures and the second part investigates how MNEs address institutional change and failure with regards to SD by three different types of action, namely, institutional engagement, political strategies and business-level strategies. A multiple

embedded case study will be conducted since the focus is upon one specific organizational field, i.e. the UK electric organizational field and four foreign energy MNEs, i.e. RWE, EDF, E.ON and Iberdrola, operating in it.

Greenwood and Hinnings (1996) argue that institutional theory has less explanatory power related to technological change. The literature on this phenomenon in relation with the

potential influential power of MNEs therefore lacks investigation. In addition, will institutional change and MNEs’ responses towards it, generate more understanding of factors explain how change occurs and the amount of influence of the organizations on the process of change in a developed environment. This research will generate insights that help to better understand the complex situation of institutional transformation and the significant role and actions of MNEs to address the process of institutional change and its failures, which means that the conducted research can help to widen the theoretical base explaining how MNEs how MNEs engage with the changing institutions to adapt business-level strategies that supports more sustainable development. Interestingly, this research tries to gain insights in how MNEs engage with the institutional framework in which they are embedded. Economic, political and social actions are embedded in social structures and culture (Baker, 2009), which highlights the complexity of formal institutions that are embedded in informal institutions and therefore the difficult task for MNEs to influence both the rules and regulations and the norms, values and beliefs to address institutional change and support sustainable development.

This thesis is structured as follows. In order to generate a solid theoretical basis, chapter two will introduce the related theoretical framework, which is the literature review where briefly the concept of innovation will be explained in the context of institutional theory as well as the system innovation approach and the three types of MNE action that explain how an MNE could address institutional change. This theoretical part forms the basis for chapter three, which portrays the methodology of the research. This chapter will provide insights on the thematic analysis by discussing the research design, case selection, data collection and data analysis. Thereafter will chapter four present the results of the case study. Chapter five will discuss the findings and the working propositions. Finally, this research will end with the conclusion, which presents the answer to the research question, and limitations, while also portraying the lessons learned for future research.

2. Literature review

The purpose of this chapter is to provide a theoretical background that will help understand MNE behaviour facing the process of institutional transformation. Firstly, this chapter will portray an overview of institutional theory. Secondly, the system innovation approach will be introduced to relate the institutional environment to innovation. Thirdly, three different types of actions, institutional engagement, political strategies, and business-level strategies, of MNEs to address institutional change will be introduced.

2.1 Innovations

The aim of this research is to analyze how the UK energy market moves towards sustainable technologies by highlighting the institutional environment and MNEs. The theoretical starting point is therefore innovation, which does not directly have to refer to technological innovations, because for this thesis a more broad definition is appropriate. Therefore is “an innovation an idea, practice or object that is perceived as new by an individual or other unit of adoption” (Rogers, 1995: p.11). Research on innovations, in general, aims to understand how innovations emerge, grow and substitute other (i.e. older) innovations (Hockerts, 2003). Noteworthy, the success of an innovation depends for a large extent on the need for change, which is inhibited in the innovation (Harper and Becker, 2004). On an organizational level, can innovation benefit the long run profits, because increasing the variety of products with innovation can positively contribute the economic turnover for an organization (Guinet and Pilar, 1999).

Sustainable innovation refers to innovation in which the innovative products, services or processes generate besides economic benefits also environmental and social benefits (Biondi et al., 2002). This makes clear that sustainable innovations are perceived as disruptive by nature (Rycroft and Kash, 2000). A known fact is that the transition towards more SD in the UK electric market is very slow. This research will therefore investigate how MNEs can address this slow diffusion. Rogers (1995) studied the field of innovation thoroughly and he states that the diffusion of innovations refers to “the process by which an innovation is communicated through certain channels over time among the members of a social system” (Rogers, 1995: p.605). Rogers stated that characteristics directly related to the innovation (i.e. relative advantage, applicability, complexity, reliability and observability) are vital for the success of the diffusion of an innovation.

Looking beyond these characteristics portrays other aspects, like the institutional framework, which is also extremely important for the success of the innovation. More in line with this

research is the definition of Geels (2004) who states that the diffusion of an innovation relates more to social change and interaction. Furthermore, the replacement of an innovation does not always have to be based on rational assumptions, but can also be related to institutional

pressures, which will be discussed later in this thesis with the system innovation approach. But related to the energy industry and its transformation towards more sustainability, it is clear that these innovations rely more on the social and sustainable arguments of innovation, than on technological innovation, which is related to the characteristics of Rogers (1995). Sustainable innovation conveys economic, societal, and environmental dimensions and besides economic benefits can the transforming institutions and MNEs make substantial improvements for the society by, for instance, providing affordable and low-carbon energy.

The next part will discuss institutional theory and the system innovation theory to get more insights on the process change and the main factors causing the impediments of innovation.

2.1.1. Institutions

A known metaphor defines institutions as the “rules of the game” (North, 1990: p.3) . With other words, North (1990) defines institutions as “the humanely devised constraints that structure human interaction” (North, 1990: p.3). Together this means that institutions are the rules, mechanisms, or structures that govern behaviour of individuals and organizations within a certain environment. Scott (1995) defines institutions as the “regulative, normative and

cognitive structures and activities that provide stability and meaning to social behaviour” (Scott, 1995: p.33). Institutional dimensions are significant concepts in study of IB, because they are the legal, political and administrative structures that shape organizational behaviour, while they also are important determinants of engaging in cross-border activity (Arslan, 2012). Institutions are subject to transformation, which means that they can be broken down or created by many different actors (Smelser and Swedberg, 2005).

Scott (2008) states that institutions function as social structures. A key characteristic of

institutions is that they are relatively resistant to change and that they stem from three different pillars: regulatory, cognitive and normative. The regulative institutions consist of rules, laws and sanctions. The cognitive pillar represents the shared social knowledge that is taken for granted and culturally supported. The normative pillar refers to the values and beliefs, the social obligation and morally governance of organizational practices. Together, these three pillars constitute the institutional profile of a specific environment. Therefore it is possible that institutional profiles differ per country and region, which makes clear that institutions are not universally the same (Kostova and Roth, 2003). The differences in institutional profiles create uncertainty for organizations that operate in a foreign environment, because they must adapt

their strategies to fit the institutional context of the environment (Khanna and Palepu, 1997). The challenge therefore lies in organizational actions that address the strategic fit between the organizational activity and the changing institutional environment (Arslan, 2012). Institutions can further be separated into formal and informal institutions. Formal institutions are laws and regulations guaranteed by governmental bodies. This means that regulatory actors issue formal institutions that normally only can be executed by actors with “rule making

authority” (Lauth, 2004: p.3-4). Formal institutions refer to the regulative pillar of Scott (2008), which makes it clear that formal institutions address the rules that can be sanctioned by the state.

On the other hand, the informal institutions are the “rules of the game” that are not codified by laws and regulations. Informal institutions are constituted by social mechanisms like norms, values, and beliefs, they are socially constructed and cultural-specific. The cultural heritage of a specific environment constitutes several values and beliefs that form the basis of social

interaction. This means that much of organizational behaviour can be related to norms, values and beliefs that function as informal guidelines in a specific environment.

2.1.2. Institution-based view

The main question of Peng et al. (2008) concerns what drives the strategy of an MNE.

Traditionally, there have been two views that explain the success and failure of cross-border activity, i.e. the industry-based view (Porter, 1980) and the resource-based view (Barney, 1991). In 2008, Peng et al. (2008) introduced the strategy tripod, which examines three different perspectives that determines organizational strategic choices. The tripod added the institutional-based view as a ‘third leg’, i.e. a third perspective, to the industry- and resource-based view. According to Peng et al. (2008) forms the strategy tripod a complete model to study fundamental questions in the field of IB, like “(1) What drives firms strategy in IB? and (2) What determines the international success and failure of firms” (Peng et al., 2009: p.931).

Much of the IB literature focused on economic variables like supply and demand or

technological innovation as the primary driver of strategic choice. However, organizations, especially in developed economies, are increasingly influenced by institutional factors for strategic choices (Peng and Heath, 1996). This highlights the salience of the relationship

between organizations and institutions, which also makes it possible to analyze the institutional variables as independent contributors of organizational strategy (Peng, 2002) in a specific context. The context is something overlooked by the two traditional perspectives, but prior research showed that the context and its institutional factors are also influencing organizational

activity (DiMaggio and Powell, 1993; Oliver, 1991). The institution-based view therefore goes beyond the fact that strategic choice of organizations is only based on the characteristics of the organization and industry. Taken together, the strategy tripod (see figure 1), helps to

understand the strategic actions of an organization and the model addresses (1) the industry, (2) the organizational resources and capabilities, and (3) the formal and informal rules in a particular environment (Gao et al, 2009).

Figure 1 Strategy tripod (adopted form Peng, 2009: p.15)

The industry-based view focuses on the organizational performances in relation to the conditions of the industry. This means that the external factors, i.e. the conditions outside the organization, determine the strategy of an MNE. These external factors are the forces that constitute the level of competitive power in an industry and therefore constitute the positioning of an organization within the industry. The industry is defined as “the group of firms producing products that are close substitutes for each other” (Porter, 1980: p.5). The industry-based view is mainly based on the Five Forces model (Porter, 1979), which means that the industry factors play a salient role and determine the opportunities and constraints for an organization. These factors are, for instance, the number of competitors in the industry, but also relate to the potential power of the suppliers and buyers (Porter, 1983). Because of the external perspective of the industry-based view, the view is also known as the outside-in perspective, which

highlights the external factors as primarily drivers of organizational strategy (Peng et al., 2009). For instance Collis (1991) argued that organizations must adapt to the externalities if they want to succeed and survive in a particular environment.

In contrast with the industry-based view, the resource-based view (Barney, 1991) relates the success of an organization to the internal resources and capabilities. A firm can succeed and survive when it gains competitive advantages because of the organizational internal strengths. An organization should position itself based upon specific resources and capabilities. These specific resources and capabilities should be firm specific, rare and hard to imitate by

competitors and therefore provide competitive advantages that leads to organizational success (Barney, 1991). Furthermore, this perspective is mainly viewed as complementary to the industry-based view (Eisenhardt and Martin, 2000) and makes clear that resources and

capabilities are very important determinants of survival and success. Where the industry-based view has an outside-in perspective, the resource-based view takes an inside-out perspective, which means that formulation of organizational strategy is based on the internal strengths instead of the external conditions of the industry.

Finally, the institutional-based view enables to analyze how organizations deal with the institutional context. Every organization is embedded in a specific environment and therefore can the ruling institutional framework, which makes up the context of an environment, cannot be ignored. Researchers must “tackle the harder and more interesting issues of how [they] matter, under what circumstances, to what extent, and in what ways” (Powell, 1996: p.297) to study this dynamic and complex phenomenon. Therefore, this thesis will take a closer look at the context of organizational activity, especially when institutions change. Pointing out these complex situations of institutional transformation will be related to the IB perspective of MNEs, namely how foreign MNEs respond to the institutional changes.

2.2. Institutional change and systematic failure

A number of scholars studied how and why institutions change over time. In particular,

Greenwood et al., (2002) propose that the process of institutional change starts with disruptive events or ‘jolts’. These are events that occur before the institutional change, which doesn’t mean that they are the primary driver for change, but function as catalysts for action (Sine and David, 2003). These disruptive events create normative, social and regulative pressures, which builds up the discontent against the established institutions.

Organizations could ignore the pressures created by these jolts. However, when the pressure builds up to a point where the old institutions do not longer hold, then the institutions could undergo a process of de-institutionalization, i.e. “the process by which institutions weaken and disappear” (Scott, 2001, p.1982). Oliver (1992) defines de-institutionalization as “the process by which the legitimacy of an institutionalized activity or practice erodes or discontinues” (Oliver, 1992: p.568). Furthermore, Greenwood et al. (2002) also state that institutional change actively occurs when existing or new actors in the environment introduce new institutions. These new institutions diminish the established consensus and introduce new institutions and possible change. This means that institutional change, or the process of institutional change, should be viewed as the weakening of established institutions through the replacement with new institutions.

Before linking the concepts of institutional change and systematic failures, the conceptualization of innovation that is adopted in this study needs to be clarified, as it is innovation that is vital for institutional transformation and it does not refer to technological innovation, but more to institutional innovation, which is the creation of new institutions. Regner and Edman (2014) posit that institutional innovation is adopted by MNEs when they address institutional complexity by “purposely seeking to work with and create new institutions, and/or change prevailing institutions (Regner and Edman, 2014: p.286). Innovation, from this perspective, is the continuous process of transformation of the prevailing institutions into new institutions. The authors state that institutional innovation refers to the ability of an organization to overcome the constraints of a foreign environment by innovation, which means the

organization is introducing new formal rules, norms, values and beliefs that would lead to a wider acceptance of their product and/or organization (Regner and Edman, 2014: p.289). However, this thesis discusses the concept of innovation in a more general manner by stating that innovation addresses more than technologies and the ability of MNEs to transform local institutions. That is why this research follows Klein Woolthuis et al (2005) when talking about innovation by arguing that “innovation is an interactive, non-linear process in which actors, e.g. firms, interact with a manifold of other organizations (e.g. research institutes, consumers, authorities, financial organizations) and institutions (e.g. regulations, culture)” (Klein Woolthuis et al., 2005). This means that the process of innovation, from this perspective, entails different actors and formal and informal constraints that lead to progress within the environment. As already mentioned, organizations are embedded in a specific industry and operate as an open system in a wider context (DiMaggio and Powell, 1983). It is believed that organizational action is influenced by social structures that provide “stability and meaning to social life” (Scott, 2008: p.48). Crucial for organizations is to engage with the social structures to gain legitimacy. Legitimacy is a form of acceptance and the assumption that the actions of organizations are appropriate and in line with the socially constructed concepts of the institutional formal and informal rules (Suchman, 1995). Hargadon and Douglas (2001) analyzed the need for legitimacy when an innovation is introduced. They propose that a successful innovation should be new in the environment, but also have some notion of familiarity.

The institutional environment consists of different actors and they could respond differently to changes. Innovation starts with change and for the aim of this research it is therefore necessary to identify the factors that impede innovative change. The literature on system innovations introduce the system innovation (SI) approach (Klein Woolthuis et al., 2005), which can be used to identify where failure occurs, i.e. what kind of failure occurs, the actors involved, and if governmental policies address or create the specific system failure. All these underpinnings

result in the following categories of systematic imperfections identified by Klein Woolthuis et al. (2005).

Infrastructure failure

In the field of innovation high quality infrastructure is needed (Smith, 1999). Organizations need reliable infrastructure that enables them to transport tangible resources (e.g. products) and intangible resources (e.g. knowledge). High investments needs in the (digital) infrastructure could negatively affect the legitimacy of the innovation.

Institutional failure

Carlsson and Jacobsson (1997) refer to hard- and soft institutional failures. Hard institutions are the formal laws, rules and regulations. In contrast, soft institutions refer to the informal rules like social norms, values and beliefs (Negro et al., 2008). Both formal and informal institutions have the potential to regulate economic behaviour of organizations, but also entail actions of political bodies and other organizations, and failure occurs when actors find themselves in conflict with these rules and regulations.

Interaction failure

An organization has a relationship with its stakeholders. Interactions among stakeholders go further than the relationship between actors in a particular industry, but also extend to other actors outside the industry, like regulators and NGOs. Carlsson and Jacobsson (1997) state that with the introduction of innovations, weak- and strong network failures arise. When there is no or little interaction they speak of weak network interactions and when there is too much interaction, they speak of strong network interaction. A strong relationship between MNEs can result in network failures according to Carlsson and Jacobsson (1997), because actors can depend too much on strategies of other actors, which leads to a situation where, for example, an organization follows the same strategy of another organization. When there is a sense that actors do not interact with each other, there is the situation of weak network failures. As a result of this failure, organizations fail to share their tactics and learning experiences. Both the

network failures can therefore impede the success of an innovation.

Capability failure

When an actor does not possess the competences or resources the problem of capability failure can occur. “Central to the argument is that firms are unable to make the leap from an old to a new technology paradigm” (Klein Woolthuis et al., 2005: p.614). This means that organizations cannot adapt to the innovation because they do not possess the flexibility, knowledge or financial resources, even if the organization can access specific resources through network interactions. An individual organization can make a difference if it possesses the right

capabilities, which will generate adaption towards innovation. Also, when an organization lacks openness and transparency, a capability failure can occur.

With the innovation approach should it be clear that innovation entails more than just

technological advancements, but that it refers to an interactive process that affects actors and institutions. This means that innovation should not only “compete with components of an existing technology, but with the overall system in which it is embedded. Technological regimes or paradigms persist because they are a complex of scientific knowledge, engineering practices, process technologies, infrastructure, product characteristics, skills and procedures which make up the totality of a technology and which are exceptionally difficult to change in their entirety” (Smith, 1999: p.44). Since innovation is related to the stimulating process of change, the similarities with the process of institutional change can be recognized. Borrowing the SI approach makes it therefore possible to identify the bottlenecks that impede innovation and to address the most significant actors causing these failures.

Institutional theory (Powell and DiMaggio, 1991) stresses that many dynamics and innovation in the organizational environment “stem not from technological or material imperatives, but rather from cultural norms, symbols, beliefs, and rituals” (Suchman, 1995: p.571). Negro et al. (2012) also showed that the lack of both stable hard and soft institutions, form the key

systematic problem regarding innovation. Therefore it is assumed that innovations are mainly blocked by institutional failures. This results in the first working proposition (WP) of this study, which can be viewed as the fundamental proposition for the coming propositions.

WP 1: Institutional failures are the most important factors that impede innovation.

2.3. Institutional engagement

North (1990) used the institutional perspective to address long-term economic growth in the environment. Economic activity can grow towards increased sustainable levels when

organizational activity is in line with the institutional framework. From this point of view are institutions patterns of human interaction that refer to economic growth, because they relate to the “division of labor and the mode of coordination of human activity” (Cantwell et al., 2010: p.569). Institutions arise when (social) innovations become standardized, either via formal rules and regulations or via norms, values and beliefs. Therefore different actors in the environment have the potential to influence institutions, but it is most interesting and in line with the research to study how MNEs address the institutional environment and the process of institutional change.

Cantwell et al. (2010) state that an institutional system in a transition produces “institutional voids”. These voids provide opportunities for MNEs to act as a driver of institutional change. Meyer (2004) and Peng et al. (2008) found that MNEs are welcomed in less developed countries, because they can bring institutional elements that are not yet available in this environment (e.g. rules and regulations related to labour safety). However, in developed

countries it is believed that MNEs can contribute to the process of transformation that already is going on (Cantwell et al., 2009).

In later research, North (2005) analyzed how human interactions can support or impede changing institutions. During the process of institutional change the dominant institutions start to lose their power, which causes uncertainty and vagueness in the environment (North, 2005). As previously illustrated, institutions refer to the formal rules and guidelines and informal norms, values and beliefs that help to understand the legitimacy of innovations. With other words, they declare what is socio-politically accepted and what is not. This makes the process of institutional change rather complex to understand because “human actors exercise choice, judgment and creativity when developing new spheres of value creation or pioneering new institutions in contexts that are fundamentally uncertain” (Cantwell et al., 2010: p.570). Therefore North (2005) stated that institutional change is a dynamic process driven by

reactions of actors on the established institutions, but in the view of Cantwell et al., (2010) could the view highlight more the specific role of MNEs during this process.

Therefore Cantwell et al. (2010) argue that MNEs influence the institutional framework through three forms of institutional engagement, which are institutional avoidance, institutional

adaptation, and institutional co-evolution. Cantwell et al., (2010) state that the forms of institutional engagement have become significant for explaining MNE activity in today’s globalizing world. In addition, the authors propose that organizations must constantly connect their business environments with the ruling institutional framework in the environment they operate.

The first form of institutional engagement is institutional avoidance, which is defined as “the organizational attempt to preclude the necessity of conformity, buffering themselves from institutional pressures, or escaping from institutional rules or expectations” (Oliver,

1999:p.154). This form means that the MNE ignores the institutional framework of the local environment, which enables them to choose to what extent they participate.

The second type of institutional engagement is the form of institutional adaptation. This type of engagement results in the fact that the organizations adjusts their internal resources and capabilities to find a better fit with the institutional environment, which means that this type of

engagement asks investment and effort of the organization. The MNE adapts to the local context to eventually operate as a ‘native’ in the host country and only tries to influence the institutional framework to a limited extent.

The final and third form of institutional engagement is institutional co-evolution. With this form, the MNE actively tries to influence the institutional environment. The MNE therefore does not passively adapt to the local institutions, but seeks to influence the established institutions, which makes the institutional environment partly endogenous. The organization therefore might try to de-institutionalize the established institutions by certain actions and strategies. The chosen form of engagement represents the strategic intentions of an MNE. Strategy refers to making a difference in organizational performance and normally are organizations are able to align their strategic intentions with the institutional environment of a host country, which is the achievement of the strategic fit (Peng, 2003), and leads to higher benefits for the organization. From this point of view it is interesting to see how MNEs address institutional change regarding this strategic fit.

Institutions are “multifaceted, durable social structures made up of symbolic elements, social activities, and material resources that provide guidelines and resources for acting as well as prohibitions and constraints on action” (Scott, 2001: 49-50). Whereas North introduced the concept of institutions as “the rules of the game” (North, 1990: p.3), does Peng (2003) explain institutional transition as the “fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect organizations as players” (Peng, 2003: p.275). Therefore it can be stated that MNEs are key players who can influence the rules regarding the process of institutional change (i.e. the game). However, Peng (2003) states that “whenever confronting difficulties, incumbents tend to extract more protection from the government” (Peng, 2003: p.285). This means that organizations, who are already operating in the market for quite a while, are actors that adapt to the institutional environment and mainly possess the resources and capabilities of the current system. Therefore they are seen as passive adapters of institutional change and not as proactive transformers of institutions. Thus because of the high rate of uncertainty and complexity that comes with institutional transformation, the

organizations might attempt to leverage their relationship with the regulatory authorities by adapting to the rules and regulations (Guillen, 2000; Hillman and Hitt, 1999). Furthermore, organizations might only take action when a disruptive event occurs (McCarty and Puffer, 1995; Hoffman, 1999). A disruptive event, like a financial crisis, asks for fundamental changes in both the formal and informal institutions. Therefore formal global rules regarding the financial

market have to be changed as well as informal norms, values, and beliefs (Oliver, 1993; Seo and Creed, 2003).

The MNE in a foreign country could face strong environmental pressures by formal institutions. In general are the formal institutions in a developed country are the ruling institutions with high influential power, which means that MNEs have little other options than to conform to the adjustments issued by the formal institutions (Doz et al., 1981). When an MNE decides to avoid the new institutions it could face compelling pressures (Rosenzweig and Singh, 1991). These pressures are known as coercive pressures (DiMaggio and Powell, 1983), which are assumed to be the strongest forcing pressures that result in the adaptation of the foreign MNE to the institutional transition. It is also assumed that MNEs operating in a foreign country have a greater need to gain legitimacy and therefore lean more on the external environment, i.e. the industry structure, technology, governmental rules and regulations and norms, values and beliefs (Scott, 1981), of the host country. This statement of Rosenzweig and Singh (1991) is related to MNEs with a multi-domestic strategy, which is a strategy by which MNEs, operating in multiple countries, customize their product and strategy to the local environment. In a

developed country and in a complex regulated market (e.g. the utility market), does the foreign MNEs needs to adjust its strategy to the local environment for gaining legitimacy, which is related to the form of institutional adaptation. Together, this following working proposition will find out if the above arguments, in favour of the institutional adaptation form, apply to this research.

WP2: In developed economies, MNEs engage through the form of institutional adaptation to support innovation

2.4. Political strategy

Most of the work on political strategies regarding MNEs relates to the resource-based view by stating that organizations are seeking to acquire political resources in the external environment to influence the constraints in the context. However, institutional theory, and the institution-based view, could be a better explaining theory, because it also looks at the context in which an MNE operates and has been proven to generate insights on MNE behaviour in a foreign

environment (Kostova and Zaheer, 1999; Rosenzweig and Sing, 1991). The MNE in an foreign country needs to gain or maintain legitimacy, which means that the MNE and its actions are perceived as acceptable by the institutional environment and its actors.

Therefore an MNE can try to influence the institutional environment through political strategies, which are “corporate attempts to shape the government policy in ways favourable to the firm

(Baysinger in Hillman et al., 2004: p.838). To understand how MNEs address institutional difficulties by influencing institutional decision-makers, this research borrows the taxonomy of political strategies of Hillman and Hitt (1999), which are the information, financial incentive and constituency-building strategy. It is believed that these strategies have influential power on regulating bodies. As already mentioned, the government plays a vital role in stimulating the process of change (Negro et al., 2012). Therefore MNEs can implement political strategies to influence the policy environment. Each strategy concerns a range of tactics to influence institutional decision makers and the details of each strategy will be discussed below.

Information strategy

The information strategy refers to the direct provision of information towards formal

institutional decision makers. MNEs using the information strategy tend to affect policies by the provision of specific information about their preferences for certain policies to institutional decision makers. This could be information about certain costs and benefits regarding different issue outcomes (Aplin and Hegarty, 1980). The main target of this strategy is the policy maker and the main tactics are lobbying, research and survey results, commissioning, think tanks, and supplying policy decision makers with position papers and technical reports (Hillmann and Hitt, 1999).

Financial incentive strategy

The financial incentive strategy also aims directly at the policymakers. MNEs who adopt this strategy try to influence institutional policies by financial inducements mechanisms. This could occur directly through financial support towards political decision makers or by hiring an institutional decision maker in exchange for honoraria.

Constituency-building strategy

In contrast with the information- and the financial incentive strategy, the constituency-building strategy is not directly aimed at the policymakers. MNEs who enforce a constituency-building strategy attempt to influence the institutional environment by influencing the informal

institutions, i.e. norms and values, through the provision of information aimed at different non-governmental actors in the environment to influence the norms, values and beliefs, who in turn, force pressures on the institutional decision makers (Baysinger et al., 1985). This strategy refers to a bottom-up theory, which states that individual or organizational behaviour has the ability to influence governmental bodies (Nelson, 2006; Baysinger et al., 1985; Lord, 2000).

One notion that Hillman and Hitt (1999) provide is that the constituency-building strategy should not be confused with collective participation. “Collective participation denotes a firm joining with other firms or interest groups in the public policy process but not the specific

strategies and tactics used” (Hillmann and Hitt, 1999: p.834). In contrast, a constituency-building strategy aims at targeting informal institutions through grassroots or bottom-up

movements. A better understanding of the taxonomy of political strategies is given in table 1.

Table 1 Taxonomy of political strategies (Hillman and Hitt, 1999)

Strategy Tactics Characteristics

Information Lobbying, commissioning research projects and reporting research results, testifying as expert witnesses, supplying position papers or technical reports

Targets political decision makers by providing information

Financial

incentive Contributions to politicians or party, honoraria for speaking, paid travel, personal service (hiring people with political

experience or having a firm member run for office Targets political decision makers by providing financial incentives

Constituency-building Grassroots mobilization of employees suppliers consumers, advocacy advertising, public relations, press conference, political education programs Targets political decision makers indirectly through constituent support

Each strategy refers to certain types of tactics that MNEs can use to directly or indirectly influence governmental bodies that can force institutional change. The key difference between the strategies is the aimed target. Whereas the targets of the information- and financial

incentive strategy are the policy makers, the targets of the constituency-building strategy are the constituents, i.e. the public environment in which informal institutions are shaped. The three strategies also differ regarding the tools they provide to influence institutional decision makers. The information-, financial incentive- and the constituency-building strategies provide, respectively, informational goods, financial support, and instruments to influence the public sphere. Noteworthy, the implementation of one strategy by an MNE does not exclude the use of other strategies. A combination of strategies can be used (Meyer et al., 1993), which highlights the complexity of political strategies and the main goal to influence the institutional framework. The increasing importance of political behaviour of MNEs also suggests that the institutional framework is becoming more significant. Wan and Hillman (2006) found that corporate factors

like global integration, international diversification and decentralized decision-making, are gaining more significance in today’s environment and therefore should MNEs adopt political strategies to influence institutional decision making, because MNEs in foreign countries are directly influenced by the political framework (Sundarm and Black, 1992).

In contrast with Hillman and Hitt (1999), do Bonardi and Keim (2005) argue that MNEs do not use the traditional types of political strategies (e.g. information, financial incentive and

constituency-building). Their research does not provide evidence for a financial incentive strategy, but this is doubtful because of the public nature of the data. The same case applies to the constituency-building strategy. However, some organizations made public statements, but this only related to very few MNEs. That is why the authors added another dimension to the traditional classification of Hillman and Hitt (1999) by distinguishing a strategy of

self-regulation. This is a political strategy that aims to address a broader set of actors with the ability to directly influence policy makers, like business groups, NGO’s and international institutions (Kolk and Pinske, 2007), to address institutional transformation.

Roland (2004) introduced a framework for better institutional understanding. In his view scholars have been reluctant to study the relationship between the social norms, values and beliefs, i.e. the informal institutions, and organizations. Where formal institutions are fast moving, are the informal institutions are slower in their transition (North, 1990). Roland (2004) concludes that MNEs should seek a better way of understanding and influencing the norms, values and beliefs in order to shape the institutional framework, because they are way harder to transform. That’s why it is assumed that a constituency-building strategy is favoured by the MNEs to influence the informal institutions, which eventually will reach the policy makers. Furthermore, Dunning and Lundhan (2008) argue that the underlying informal institutions are the most important for creating long-term effects. From this point of view it should also mean that the constituency-building strategy is the leading strategy for the organization in order to force institutional change. In addition Kolk and Pinske (2007) argue that MNEs refrain as much as possible from too much interference with host-country governments, because influencing the home-country government has the highest priority for the MNE. This and all the other

arguments above, feed the assumption that the indirect political strategy, i.e. the constituency-building strategy, is the best way to successfully address institutional change on a political level, which results in the following working proposition.

WP3: MNEs in developed economies are more likely to influence policy-makers indirectly through the constituency-building strategy.

2.5. Sustainable development

Before talking about sustainable strategies of MNEs, this section will discuss in greater detail what sustainable development (SD) is.

Capturing a straightforward definition of SD and the goal towards sustainability is a difficult task (Korhonen, 2007). Increasing concerns for the environment, natural resources and social equity in the 1980s resulted in the concept of SD (Hunter, 1997). It conveys realizing economic growth “that is forceful and at the same time socially and environmentally sustainable” (WCED, 1987: p.xii). SD is not a clear-cut concept because it affects different actors and it conveys environmental, societal and economic dimensions, which are both separate and connected dimensions (Giddings et al., 2001). The most well-known definition regarding SD was issued by the World Commission on Environment and Development (WCED) by stating that SD is

“meeting the needs of present without comprising the ability of future generations to meet their needs” (WCED, 1987: p.24).

The key sectors of SD, economy, environment and society, are known as interconnected sectors (Barton, 2001; Du Plessis, 2007). Barton (2001) states that there should be a reasonable balance between the economic, social and environmental dimensions and therefore the model (see figure 2) assumes that the three different sectors are equally valuable. However, this is normally not the case, because, from a traditional point of view, the economic dimension is favoured over the environmental and societal dimensions. Furthermore, the model implies that the three dimensions could be seen as separate, which leads to the assumption that trade-offs between the economic, environmental and societal dimensions can be made. This weakens SD if, for instance, environmental resources can make deals with the economic market.

Most debates regarding sustainable issues are concerning economic or environmental issues, which means that the social dimensions is overlooked (Giddings et al., 2001). Furthermore, the separation between the different dimensions results in the fact that technological fixes can be introduced to reduce problems of one dimension of sustainability. For instance, emission rights trading between countries are only a temporary fixes and do not solve the deeper problem of pollution and climate change. Other economic technical solutions, like taxing instruments and feed-in tariffs are viewed as ways of moving industries towards SD. Some might say that these instruments are fair, but others could say that the do not target the core of SD, which might constitute the wider fall out of social issues on the SD agenda (Giddings, 2001: p.189).

Regarding the SD agenda, organizations were the first type of actors addressed by the United Nations (UN) to take their responsibility to ensure SD. That is why the following section will discuss the relation between sustainability and MNEs, highlighting business-level strategies in relation with the economic, societal and environmental dimensions of sustainability.

2.5.1. Sustainability and business strategy

In the view of the UN do MNEs have the power to influence different actors in society and therefore they should take their responsibility to create a sustainable future. Because MNEs are the dominant international institutions of the planet, they must face and address the problems regarding sustainability (Hawken and McDonough, 1993). The fact that organizations are perceived as a dominant institution that hold strong influential power towards SD, results in the fact that organizations are viewed as a potential solution to hazardous environmental problems, which ultimately could lead to the achievement of global SD. MNEs, as powerful actors,

therefore have the ability to turn older conventions and practices into more sustainable ways of doing business, which might function as a standard for the whole industry.

Another characteristic of MNEs is that they are making the world much smaller, which is why globalization can be viewed as the primary result of multinational activity. MNEs introduce new technologies, trade and investment on a global scale, which brings the world both economically and culturally together. Having such an influence in the world, give MNEs a huge amount of political and economic power. From a sustainability perspective this means that MNEs can initiate or contribute to initiatives that lead towards more SD. Important to note is that MNEs can be viewed as institutions without home territories, which makes them a global law and policy actor, something that cannot be said of governmental bodies in a globalizing world. Regarding the role of the state and globalization does Aman (1998) states the following:

“The state, of course, can and often does facilitate the process of globalization, by, for example, providing for property rights and other legal regimes that may encourage economic development. Thus, this is not to argue that states have or can have no role in the process of globalization. Rather, it is to argue that their role is no longer as central as it once was and, to the extent the state engages in activities that deter globalization, they can often be avoided by multinational actors who simply decide to move aspects of their operations elsewhere or establish parallel. if not competing, legal regimes that cater primarily to their interests” (Aman, 1998: p.31).

Nowadays, it could be argued that MNEs hold more influential power than the government bodies in the areas they operate. This adds to the fact that MNEs are becoming more salient regarding their role to introduce SD.

MNEs are formal organizations that operate on a set of objectives. Traditionally the focus of organizational objectives regarding sustainability has been limited to economic motivation, as Milton Friedman (1970) argued that the only social responsibility of a business is to make profit, while obeying the rules of the game. Objectives issued by an organization are translated in mission and vision statements. The chosen strategy therefore functions as a pathway for the organization to achieve its vision and to set out its mission, which together is the realization of the objectives. An organization that incorporates sustainability should incorporate economic, social and environmental goals in its strategy.

Fowler and Hope (2007) showed that there have been a growing number of organizations that increased profits, while also implementing SD, over the recent years. They also argue that the implementation of sustainable practices into the core strategy can give a competitive advantage over other organizations. This might be the vital point for SD, because, as Lee and Ball (2004) state, there is little support for voluntary sustainable initiatives by organizations and

sustainability rather stems from “self-interest and survival insights” (Lee and Ball, 2004: p.89). This raises questions on the motivations for SD and if organizational SD does tackle the deeper rooted and global problems like climate change, poverty and security of natural resources. This also has attracted the attention of many scholars and most of their research aimed at linking SD to economic benefits (Welford, 1995; Shrivasta, 2006), which highlights that organizations should become more environmentally and socially engaged if they want to succeed and survive. While sustainability gains momentum, it can be beneficial for organizations to measure their sustainable impact.

To provide a better understanding on how MNEs contribute to SD, Escobar and Vredenburg (2011) introduced four business-level strategies: green consumerism, reduced legal liability, reduced cost and reduced risk, which are discussed in greater detail below.

Green consumerism

Green consumerism is the increased investment of MNEs in innovations that reduces environmental impacts. The result often leads to more sustainable, but also more expensive products that generate value from the point of view of the customer, but have little difference in the service generated. This means that organizations depend on product differentiation in order to gain more value from the newly created technology and product (Reinhardt, 1998).

Reduced legal liability

Regulators are often seen as the main driver behind SD. Regarding these rules, organizations could comply with the regulations, influence the nature of the regulations (Barret, 1991) or ignore the regulations by introducing new industry standards (King and Lenox, 2000). On the other hand, do regulators have the power to sanction organizations that ignore the regulations and therefore force them to comply with the regulations. Both compliance with and influencing the rules and regulations yield problems for the organization. Compliance will give the

organization short-term benefits, but there is no long-term competitive advantage to gain, since all other organization could also comply. Staying one step in front of the regulators and trying to influence the rules and regulations can generate mid-term advantages for the MNE. However, such a strategy depends a lot on the capabilities of the organization to read the upcoming trends and to invest in innovations.

Reduced cost

Organizations can reduce costs by implementing SD practices. For Example, Shrivastava (1995) analyzed the case of 3M who reduced millions by implementing a more sustainable strategy, which meant the reduced use of raw material, energy consumption and emission. This makes clear that adjustments in behaviour, which require less technological and process innovation, can bring substantial benefits towards SD.

Reduced risk

MNEs operate in various complex, geographic and socio-political environments. This means that MNEs face different contexts and unexpected (disruptive) events, which can harm the

organization as a whole. These unexpected events create tensions between society and

organization and ask organizations to accommodate their resources and capabilities in order to deal with these tensions. This makes it very important for organizations to engage with its stakeholders to make sure that they are always informed and that disruptive events cannot harm the MNE (Freeman, 1984). Especially in the utility industry, where organizations are exposed to a complex internal and socio-political (i.e. institutional) environment, it is very important to engage with different groups (e.g. NGOs, consumers, government) (Escobar and

Vredenburg, 2011). Minimizing the risk of frictions between different groups, makes clear that this business-level strategy is also known as the reduced risk exposure strategy.

Porter (1980) argued that organizational strategy is often viewed as the means by which an MNE achieves and sustains a competitive advantage over other organizations, in- or outside the industry. All the four business-level strategies provide the opportunity for MNEs to develop specific capabilities that can lead to these competitive advantages (Hart, 1995) and reduce institutional pressures. Meeting the future needs without comprising the present is still the most common definition regarding sustainability. Therefore is SD concerned with creating a balance between economic, social and environmental issues, in a way that all the dimensions benefit and thus lead to synergy. However, a regulatory framework regarding SD remains ambiguous, because SD is not obligated and it depends more on the voluntary initiatives of the organization. The lack of a clear regulatory framework contributes to the vagueness of

institutional transformations, which highlights the salience of MNE activity to force SD (Steurer et al., 2005).

An institutional interpretation of SD has been introduced by the EU, who stated that sustainability is “a concept whereby companies decide voluntarily to contribute to a better society and a cleaner environment” (CEC, 2001: p.4) and as “a concept whereby companies integrate social and environmental concerns in their business operations and in their

interaction with their stakeholders on a voluntary basis” (CEC, 2002: p.3). Both definitions mean that organizations have the responsibility to a large group of different actors. The responsibility is still voluntary and not obligated, but by integrating the economic, social and environmental dimensions into their daily operations, management, and activities, which go beyond

compliance, the MNEs could reduce pressures from these different stakeholders groups. To tackle global dilemmas, MNEs need to depend on their managerial skills to align their

business-level strategy with their capabilities and technologies to empower every subunit of the MNE with the same competencies. This enables them to react quickly to changing institutions (Prahalad and Hamel, 1990). MNEs have the ability to economically yield strategies of scale and scope. However, MNEs, which are large geographically dispersed organizations and therefore constrained by institutional pressures. Sustainable issues that address certain problems can destroy economic expansion of MNEs.

Organizations can choose between different business-level strategies to implement sustainable opportunities. Waddock (2008) investigated the response of MNEs on institutional pressures for greater accountability, responsibility, transparency and sustainability. Regarding SD, her study found that the emerging institutional infrastructure created new rules that put more

pressure on the MNE. Furthermore, because the public expectation holds MNEs responsible for creating SD, this research assumes that MNEs are proactive in creating innovations that

contribute SD. Furthermore, Pinkse and Kolk (2008) state that MNEs have the capacity to develop firm-specific advantages (FSAs) that benefit the environmental dimension, while also benefitting the profitability of the organization and other factors that lead to success and

survival. Unique FSAs give the organization a competitive advantage over other competitors and therefore MNEs might invest in creating unique FSAs. Examples of these FSAs are “product differentiation based on improving environmental quality for which consumers are willing to pay a premium” (Pinske and Kolk, 2008: p.1362), which relate to the green consumerism business-level strategy of Escobar and Vredenburg (2008). Together, these arguments result in the following working proposition:

WP4: The strategic response of MNEs to support sustainable development and to reduce institutional pressures, is likely to consist mainly in the green consumersism strategy.

3. Method

This chapter will present the research methodology, which will help answering the research question mentioned in the introduction. The research will use a multiple embedded case study and will collect and analyze data from both newspaper articles and corporate reports regarding the energy industry in the UK. This will lead to a thematic analysis of foreign MNEs addressing institutional change and failures to create more SD in the UK energy market.

3.1. Research design

This research adopted a case study method as research design. Conducting a case study as research method has traditionally been viewed as a method that lacks objectivity, mostly because of the singularity of the case study or because of the few data available. Besides this negative view, case studies are used to create insights that may not be achieved with other research methods. It is a significant method for exploratory reasons because it tries to find answers on a specific topic where the literature is less developed. That is why Eisenhardt (1989) states that case studies are “well suited to new research areas or research areas for which existing theory seems inadequate” (Eisenhardt: 1989: p. 548). Rowley (2002) argues that three factors determine the chosen research methodology: 1) the types of questions to be answered; 2) the extent of control over behavioural events; and 3) the degree of focus on contemporary as opposed to historical events. The research question is the most important factor determining the research method and since this research is interested in finding out how MNEs respond to institutional change, a survey or an archival analysis is not suitable (Yin, 1994).

Since this research studies the contemporary problems of institutional change and MNE behaviour, the case study is a relevant research method. The behaviour of MNEs cannot be controlled or influenced by the research and the study uses multiple sources like newspaper articles and corporate reports. This together makes clear that a case study is a suitable research method for this thesis, as Yin (1994) states, “a how or why question is being asked about a contemporary set of events over which the investigator has little or no control” (Yin, 1994: p.9). Furthermore, according to Yin (1994) is a case study an empirical method that investigates phenomena within a real life context. This highlights that case studies have the ability to

investigate the phenomenon and its context, because case studies look at the “world around us” (Rowley, 2002). Studying the response of MNEs on institutional change and failure, calls not only for the understanding of MNE behaviour, but also for the understanding of the wider social context in which institutions are created.

This research adopted a multiple embedded case study design since this research focuses on one specific organizational field, the UK electric industry, and it considers the foreign MNEs operating in the UK as the unit of analysis. The four foreign MNEs operating in the UK are EDF, E.ON, RWE (npower) and Iberdrola (Scottish Power) are the unit of analysis and some

background information on these MNEs is given in table

Table 2 Overview of the foreign energy MNEs in the UK

EDF E. ON RWE (npower) Iberdrola

(Scottish Power)

Year entered the UK 2002 2002 2002 2006

Home country France Germany Germany Spain

Revenue UK (2012) £875 million £173 million £126 million £94 million Number of employees 158760 (2010) 58530 (2014) 70860 (2010) 30680 (2013) Key people UK Vincent de

Rivaz (CEO) Tony Cocker (CEO) Paul Coffey (CEO) Keith Anderson (CCO) UK costumers (2012) 5.7 million 5.3 million 6.5 million 5.2 million

The privatization of the UK energy market in 1990 created opportunities for acquisitions that resulted in an open and competitive energy market. The privatized energy organizations were called “Regional Electricity Company” (REC). Since 2001 many acquisitions from bigger domestic and foreign MNEs resulted in the fact that today the UK energy market is

characterized by six MNEs also known as the ‘Big Six’, which consist of four foreign MNEs (e.g. RWE, E.ON, EDF and Iberdrola) and two domestic MNEs (SSE and Centrica). Together the MNEs hold over 90 percent of the market.

The case has been selected to highlight the salience of the institutional environment on MNE behaviour. Especially the UK was chosen because it is a privatized market where many foreign MNEs operate. MNEs that hold strong power in the market make the UK an interesting field of study. Secondly, the proposed policies issued by the UK government, have the aim to reduce the

carbon emissions and to influence the development of renewable energy. However, the policies have not been proven to be very successful over the years and resulted in the fact that a

straightforward regulatory framework is missing. These two objectives might conflict, but more importantly, they portray that the industry and the institutional field are changing. And finally, since IB is the main concern of this research, it is interesting to study how MNEs in a foreign developed economy react to institutional failures and change, which makes the four MNEs operating in the UK very interesting to study.

Therefore this research focuses on analyzing and understanding the context as it investigates the relationship between foreign MNEs and the changing institutions. This makes the research explorative in nature, because it primarily analyses MNEs’ strategic behaviour addressing intuitional change (Saunders et al., 2009). But to strengthen the generalizability of the results, statements and findings of other studies are included and tested from a deductive perspective. When talking about innovation, this research does not refer so much to technological

innovation, but more to the definition of Lundvall (1992), who defines innovation as the “elements and relationships which interact in the production, diffusion and use of new, and economically useful, knowledge” (Lundvall in Foxon et al., 2004: p.2124). The energy market in the UK is an important field of study because it finds itself in such an innovative transition. Organizations and other actors are therefore embedded within a wider social and economic system (Rip and Kemp, 1998). Furthermore, the transformative stage, which also entail the more bottom-up influences from other actors, make the UK an interesting field of study.

To sum up, over the years, the UK energy industry has been in a transformative stage, where the reduction of carbon emissions and generating energy from renewable energy sources became the primary goals. For example, the White Paper of 2007 was introduced to develop an

economically credible emissions reduction path, and to strengthen UK’s leadership position in the fight against climate change. From this perspective this research is exploring how MNEs deal with these pathways that helped to transform the UK energy market.

3.2. Data collection

This research used only secondary data. A broad definition of secondary data is that the data is collected by someone other than the user. An advantage of secondary data is that it takes less time to collect. For the first part of the research, which concerns systematic failures regarding innovation, newspaper articles from three different newspapers (i.e. Financial Times, Daily Telegraph and The Guardian) were collected. The second part of this case study, which concerns how MNEs address institutional change and failure by three forms of organizational action (i.e.